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REITs Get Respect from the Market — a New Sector Home

Beginning in September 2016, publicly traded equity REITs (real estate investment trusts) and other listed real estate companies will get a new home in the S&P 500. They are moving out of the Financials Sector and into a newly-created Real Estate Sector.

Market Sector Move for Equity REITs

The leading market “sector” classification system — known as Global Industry Classification Standard (or GICS) — is maintained by S&P Dow Jones Indices and MSCI Inc. Real Estate will be the 11th and newest sector. “Equity REITs” will be one of the industry groups listed under the umbrella of the new Real Estate Sector, and sub-industries will include office REITs, diversified REITs, and others.

Mortgage REITs — which buy mortgages secured by property rather than the property itself, and typically take on much higher debt levels — will remain in the Financials Sector.

Reactions

Here is a survey of the commentary I’ve seen in my reading on this market move:

The sector move reflects a growing recognition of equity REITs as a legitimate form of investment, which isn’t tightly correlated to stocks or bonds.

Bullish view: equity REITs will move into the mainstream and no longer be viewed as an “alternative” or “niche” investment category. In a separate sector, equity REITs will gain larger asset allocations and attract more attention from institutional investors who use an equal sector allocation benchmark (and are hungry for yield in a low-rate environment).

Bearish view: in a new and relatively small sector, REITs will lose capital flows due to selling pressure from financial-oriented mutual funds and ETFs.

REITs’ correlation with Financials will go down: when the Financials Sector gets “whacked” on an anti-bank sentiment-driven trading day, REITs will no longer suffer by association; they will be sheltered within the new Real Estate Sector.

The sector move may increase awareness of REIT accounting and valuation. Instead of normal corporate earnings, REIT performance is typically measured in terms of “Funds From Operations,” which includes net income + depreciation + amortization, and subtracts gains from sales of property.